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  • From: bobf <bobford79 AT yahoo.com>
  • To: homestead AT lists.ibiblio.org
  • Subject: [Homestead] Fed is giving to prop up hedge funds
  • Date: Mon, 22 Dec 2008 11:46:38 -0800 (PST)

Wow, this just has me shaking my head. The imbecilic Congress gives billions
to failed banks to rescue failed bankers and now the fed is giving billions
to failed hedge funds to rescue failed hedge fund managers.

Unbelieveable

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FT.com

Hedge funds gain access to $200bn Fed aid

By Krishna Guha in Washington
December 20, 2008 6:01:44 AM


Hedge funds will be allowed to borrow from the Federal Reserve for the first
time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US
company investing in securitised consumer loans under the Term Asset-backed
Securities Loan Facility (TALF). This includes hedge funds, which have never
been able to borrow from the US central bank before, although the Fed may not
permit hedge funds to use offshore vehicles to conduct the transactions.

The asset-backed securities to be funded under the programme are pools of
credit card receivables, automobile loans and student loans.

The idea is to increase the supply of these loans and reduce borrowing rates
by ensuring that the companies that make the loans can sell them on to
investors who have guaranteed access to low-cost funding from the Fed.

The TALF is a key plank of the unorthodox strategy set out by the Fed last
week as it cut interest rates virtually to zero. Washington insiders expect
the programme will be dramatically expanded next year with further capital
support from Treasury once the Obama administration takes office.

A senior official in the outgoing Bush administration told the Financial
Times it could also be broadened to include new commercial and residential
mortgage-backed securities.

The Fed thinks risk premiums or "spreads" for consumer loans are much higher
than would be justified by likely default rates, even assuming a nasty
recession.

It attributes this to a lack of buying interest in the secondary market where
the loans are sold on to investors. By making loans to these investors on
attractive terms it aims to increase market liquidity.

Making the scheme open to all US companies is a radical departure for the
Fed, which normally supports financial market liquidity indirectly by
ensuring banks have adequate liquidity to make loans to other investors.

However, the liquidity the Fed is providing to banks is not flowing through
to financial markets, because banks are balance-sheet constrained and
risk-averse. So it is channelling funds directly to investors.

The scheme is not designed specifically for hedge funds and a wide range of
financial institutions are likely to participate.

Nonetheless, Fed officials hope that hedge funds will be among those
investors that take advantage of the low-cost finance to drive down spreads.

The loans will be secured only against the securities and not the borrower.
However, the Fed will lend slightly less than the value of the securities
pledged as collateral. The Treasury has committed $20bn to cover potential
losses.

Since the credit crisis erupted, hedge funds have complained that they cannot
get the leverage they need to arbitrage away excessive spreads and meet high
hurdle rates of return.

"Demand is there for leverage but not supply," said Sylvan Chackman, head of
global equity financing at Merrill Lynch.

In effect, the Fed will now take on the role of prime broker – the lead bank
that lends to a hedge fund – for specific assets.

Additional reporting by Henny Sender in New York

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